Euro zone government bond yields edge down after US-EU trade deal

By Stefano Rebaudo

July 28 (Reuters) - Euro area government bond yields edged down on Monday after a trade agreement between the U.S. and the European Union introduced a 15% U.S. import tariff on most EU goods, broadly in line with economists’ forecasts.

Expectations of a tariff deal and a hawkish tilt from the European Central Bank prompted investors to scale back bets on future rate cuts last week, pricing in just a 60% chance of a 25 bps easing move by December.

ECB policymakers appeared to temper market bets on no more rate cuts the day after the central bank meeting, however.

Markets are pricing an ECB deposit facility rate at 1.83% by December EURESTECBM4X5=ICAP -- implying a 68% chance of a rate cut -- from 1.85% late Friday and 1.78% before the ECB statement on Thursday.

They indicated a depo rate at 1.73% early last week, before a U.S.-Japan trade deal helped ease fears over the recessionary impact of a trade war.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, was down 0.5 basis points (bps) at 2.71%, after rising more than 10 bps in the last two sessions.

German 2-year government bond yields DE2YT=RR – more sensitive to expectations for ECB policy rates – were flat at 1.93%, after rising more than 13 bps last week.

Italy’s 10-year government bond yields IT10YT=RR fell 1.5 bps at 3.57%. The spread between BTP and Bund yields - a market gauge of the risk premium investors demand to hold Italian debt - was at 85.5 bps. It hit 84.20 bps in June, its lowest level since March 2015.